BJMP2033 Chapter 2

Processes , Technology & Capacity

Operations Management - 7th Edition

Roberta Russell & Bernard W. Taylor, III 1
 Contents
2.1 Introduction
2.2 Process Planning
2.2.1 Outsourcing
2.2.2 Process Selection - PPM & Breakeven
2.3 Process Analysis – Assembly Chart
2.4 Process Innovation
2.5 Technology Decisions
2.5.1 Financial Justification of Technology
2.5.2 Technology Primer
2.6 Capacity Decisions
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 Process Planning
Process
◦ a group of related tasks with specific inputs and
outputs
Process design
◦ what tasks need to be done and how they are
coordinated among functions, people, and
organizations
Process strategy
◦ an organization’s overall approach for physically
producing goods and services
Process planning
◦ converts designs into workable instructions for
manufacture or delivery – how a product will be
produced or a service provided
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 Process Strategy
 Vertical integration
◦ extent to which firm will produce inputs and control
outputs of each stage of production process. The degree to
which a firm produces the parts that go into its products
◦ E.g., Proton produces CAMPRO engine only but
others (CONTINENTAL) makes tires.
Capital intensity
◦ mix of capital (i.e., equipment, automation) and labor
resources used in production process
Process flexibility
◦ ease with which resources can be adjusted in response to changes in
demand, technology, products or services, and resource availability
Customer involvement
◦ role of customer in production process (meetings &
feedbacks)
◦ Customization (Asia) of packaging, labeling and
ingredients (e.g., KFC Nasi Ayam)
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 Outsourcing
This approach is made basically based on an evaluation
of the following factors:
e th e it em or b uy it?
i ch i s c h e a p e r to mak n d (2)
 Cost – wh m ay m a k e t h em a
n l e s s c a p a ci t y
 Capacity – (1)
Firm i
a p a c i ty m a y b u y it
firm with full c u ce item i s e a s y i f m a ke in-
n s i st e n t ly p r o d
 Quality – to co
house!
Speed
– small supplier mor
Reliab e flexible than bigg
ility – reliable sour er!
IMPORTANT coz ces are VERY
Quality & Timing! suppliers need to comply with
Expert
ise – Keep it as sec
ret! COKE & KFC
!!
6-5
 Customization & Expertise
A

B
The product that has given the world its best-known taste was born in Atlanta, Georgia, on
May 8, 1886. Dr. John Stith Pemberton, a local pharmacist, produced the syrup for Coca-
Cola®, and carried a jug of the new product down the street to Jacobs' Pharmacy, where it
was sampled, pronounced "excellent" and placed on sale for five cents a glass as a soda
fountain drink. Carbonated water was teamed with the new syrup to produce a drink that
was at once "Delicious and Refreshing," a theme that continues to echo today wherever
Coca-Cola is enjoyed. 6-6
 The Sourcing Continuum

s o n n tw o
o
E ri cs ed b
e e
etw ided t
y - h e en t
d ec
Son
em ific
o c k rran g
o h a v e
p ec
L An a nies wh es in a s
g & in
pa rc
com re resou oject
e i n a rt pr
Bo M sha

AIRASIA &
JETSTAR (India)
6-7
 Process Selection (pg. 226)
 Projects
one-of-a-kind production of a product to customer order!
Usually take a long time to be completed! (Road & High rise
building constructions, Shipbuilding, Airplane A380)
 Batch production
processes many different jobs at the same time in groups or
batches
More customization based on Customer Orders (Dd) & Market
Fluctuations (PRINTERS, BAKERIES, FURNITURE)
 Mass production
produces large volumes of a standard product for a mass market
 Continuous production
used for very-high volume commodity products. Usually need
24-hour!
OIL REFINEMENT, TREATED WATER (IWK), PAINTS
6-8
 Product-Process Matrix

Source: Adapted from Robert Hayes and Steven Wheelwright, Restoring the Competitive Edge Competing
through Manufacturing (New York, John Wiley & Sons, 1984), p. 209. 6-9
 Types of Processes

PROJECT BATCH MASS CONT.

Made-to- Made-to-
Type of
Unique order stock Commodity
product (customized) (standardized )

One-at-a- Few
Type of Mass Mass
customer time individual
market market
customers

Product
demand Infrequent Fluctuates Stable Very stable

Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive
Advantage (New York:McGraw-Hill, 2001), p. 210
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 Types of Processes (cont.)

PROJECT BATCH MASS CONT.

Demand Low to
Very low High Very high
volume medium

No. of Infinite Many,

different Few Very few
products variety varied

Repetitive, Continuous,
Production Long-term Discrete, job
system assembly process
project shops
lines industries
Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive
Advantage (New York:McGraw-Hill, 2001), p. 210
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 Types of Processes (cont.)

PROJECT BATCH MASS CONT.

General- Special- Highly

Equipment Varied
purpose purpose automated

Primary Mixing,
Specialized
type of Fabrication Assembly treating,
work contracts
refining

Experts, Limited
Worker Wide range Equipment
crafts- range of
skills of skills monitors
persons skills
Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive
Advantage (New York:McGraw-Hill, 2001), p. 210
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 Types of Processes (cont.)

PROJECT BATCH MASS CONT.

Efficiency, Highly efficient,

Custom work, latest Flexibility,
Advantages technology quality
speed, large capacity,
low cost ease of control

Capital
Non-repetitive, Costly, slow, Difficult to change,
Dis- investment;
small customer difficult to far-reaching errors,
advantages lack of
base, expensive manage limited variety
responsiveness

Machine shops, Automobiles,

Construction,
print shops, televisions, Paint, chemicals,
Examples shipbuilding,
bakeries, computers, foodstuffs
spacecraft
education fast food

Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive Advantage
(New York:McGraw-Hill, 2001), p. 210 6-
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Make a Guess?

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MS Oasis of the Sea

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 Break-Even Analysis
 examines cost trade-offs associated with demand
volume
Cost
◦ Fixed costs (f)
 constant regardless of the number of units produced
◦ Variable costs (v)
 vary with the volume of units produced
 Revenue
◦ price at which an item is sold
 Total revenue
◦ is price times volume sold
 Profit
◦ difference between total revenue and total cost

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Process Selection with
Break-Even Analysis (cont.)

TR = TC
vp = cf + vcv
vp - vcv = cf
v(p - cv) = cf
cf
v = p - cv
Solving for Break-Even Point (Volume)
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 Break-Even Analysis: Example
Fixed cost = cf = $ 5,000
Variable cost = cv = $5 per bicycle
Price = p = $10 per bicycle

Break-even point is
cf 5000
v= = = 1000 bicycles
p - cv 10 - 5

The company must sell more than 1000 bicycles to

make a profit!
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Break-Even Analysis: Graph
Dollars

Total
$3,000 — cost
line

$2,000 —

$1,000 —
Total
revenue
line
400 Units
Break-even point

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 Exercise 1
T&R own a burger stall with initial investment of
RM2700. They have 3 employees. The basic cost
for burger and wedges is RM1.10. Labor wage and
supporting materials are RM0.90. If a combo can
be sold at RM5.90 each, what is the:
1 – Breakeven point?
2 – Breakeven point in RM?

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 Exercise 2
Based on Exercise 1, if they choose to use some of
old stuff, the initial investment can be reduced to
RM 1200. However, the labor wage and supporting
materials are rose to RM1.30.
1. What is the breakeven point for this new
process?
2. New breakeven point in RM?

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 Exercise 3 (6-7)
Investment in dry cleaning machine of $15,400
which can process 40 shirts an hour. The cost is
$0.25 and selling price is $1.10 per shirt.
Calculate the questions:
1. How many shirts that will be breakeven point?
2. If workload is varied from 50 to 200 shirts a
day, how long it take to breakeven point?
3. If the selling price is cut down to $0.99 a shirt,
and average shirts processed are 250 per day, how
long it take to breakeven point at this stage?

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 Process Plans
Set of documents that detail manufacturing
and service delivery specifications.
assembly charts or BOM (Bill of Material)
operations sheets or routing sheet
quality-control check-sheets
In Hospital, they have a set of SOP (Standard
Operating Procedures) or protocols!

Process Plan is how the decision is made! To

CHOOSE!

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 Process Selection (pg. 226)
Process A is $2000 for investment and variable cost of
$5/unit. And B which is a new investment is $10,000.
And a new raw material cost is RM2 per bottle and labor
cost is RM1 per bottle!

Process A Process B
$2,000 + $5v = $10,000 + $3v
$2v = $8,000
v = 4,000 bottles

Below or equal to 4,000, choose A

Above or equal to 4,000, choose B 6-
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 Exercise 4 (6-6)
A) King Pizzaria invested $35,000 for opening a
restaurant. If King Supreme pizza can be sold for
$50 each, what is the breakeven point if labor &
material costs are $15?
B) If initial investment can be reduced by $5000
while labor and material costs are raised to $16,
what is the new breakeven point? And for what
volume of demand should the King Pizzaria
choose this process?

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 Exercise 5
Process A Process B Process C

Fixed Cost RM12,000 RM45,000 RM90,000

Variable Cost RM6/unit RM4/unit RM2/unit

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 Exercise 6
School KAFE can make a pizza for cost $8 per
unit. Staff and material costs are $ 150 per day.
PizzaHAT nearby kafe can make pizza for $28 per
unit. If staff and material costs can be reduced by
half, should School KAFE make or buy the pizza?
Answer:
X = 150 – 75/28-8
X = 75/20
X = 3.75 unit of pizza
Scholl KAFE should buy from PizzaHAT if
demand is lower than 3.75 unit.
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Exercise 7

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Process Analysis

•systematic
examination
of all aspects
of process to
improve
operation

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 An Operations Sheet for a Plastic Part
Part name Crevice Tool
Part No. 52074
Usage Hand-Vac
Assembly No. 520

Oper. No. Description Dept. Machine/Tools Time

10 Pour in plastic bits 041 Injection molding 2 min
20 Insert mold 041 #076 2 min
30 Check settings 041 113, 67, 650 20 min
& start machine
40 Collect parts & lay flat 051 Plastics finishing 10 min
50 Remove & clean mold 042 Parts washer 15 min
60 Break off rough edges 051 Plastics finishing 10 min

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 l y s i s (p g . 2 35 )
Process A n a
Building a flowchart
◦ Determine objectives
◦ Define process boundaries
◦ Define units of flow
◦ Choose type of chart
◦ Observe process and collect data
◦ Map out process
◦ Validate chart
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 s Flow ch ar ts
Proces
To look at manufacture of product or delivery of
service from broad perspective
Incorporate
◦ nonproductive activities (inspection, transportation,
delay, storage)
◦ productive activities (operations)
◦ Objective: TO ANALYZE THE EFFICIENCY OF
A SERIES OF PROCESSES AND TO SUGGEST
IMPROVEMENTS!
◦ Also as: To provide a STANDARDIZED method
for DOCUMENTING the steps in a PROCESS
and can be used as TRAINING TOOL!
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Process Flowc
hart
Symbols

Operations
Inspection
Transportation
Delay
Storage
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 Process
Flowchart
of Apple
Processing

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6-
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Simple Value Chain Flowchart

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Process Innovation

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 From Function to Process

Manufacturing Product Development

Purchasing
Accounting

Sales Order Fulfillment

Supply Chain Management

Customer Service

Function Process

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Process Innovation Strategic
Directives

Baseline Data
Customer Goals for Process Benchmark
Requirements Performance
Data

High - level Innovative

Process map Ideas Design
Principles

Detailed Model
Process Map Validation Key
Performance
Measures
Pilot Study
of New Design

Goals Full Scale

No Met? Yes Implementation

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High-Level Process Map

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 Principles for Redesigning
Processes
1. Remove waste, simplify, and
consolidate similar activities
2. Link processes to create value
3. Let the swiftest and most capable
enterprise execute the process
4. Flex process for any time, any place,
any way
5. Capture information digitally at the
source and propagate it through
process

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 Principles for Redesigning
Processes (cont.)
t h r o u g h f r es h e r a n d
Provide visibility c e s s st a tu s
n f o r m a ti o n a b o u t p r o
ric h e r i b a c k
s o r s a n d f e e d
Fit process with sen
t c a n p r o m p t a c tio n
loops tha to p r o c e s s
Add analytic capab ili t i e s
c r e a te k n o w le d g e
Connect, collect, and h o t o u c h it
p r o ce s s th r o u g h a l l w
aro u n d n c e s
w i t h p r e f e r e
Personalize process
s o f p a r tic i p a n t s
and habit

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 Techniques for Generating
Innovative Ideas
Vary the entry point to a problem
◦ in trying to untangle fishing lines, it’s best
to start from the fish, not the poles
Draw analogies
◦ a previous solution to an old problem
might work
Change your perspective
◦ think like a customer
◦ bring in persons who have no
knowledge of process
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Techniques for Generating Innovative
Ideas (cont.)
 Try inverse brainstorming
◦ what would increase cost
◦ what would displease the customer
 Chain forward as far as possible
◦ if I solve this problem, what is the next
problem
 Use attribute brainstorming
◦ how would this process operate if. . .
 our workers were mobile and flexible
 there were no monetary constraints
 we had perfect knowledge
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 Technology Decisions
Financialjustification of technology
1. Purchase cost
2. Operating Costs
3. Annual Savings
4. Revenue Enhancemen
t
5. Replacement Analysis
6. Risk and Uncertainty
7. Piecemeal/Fragmented
Analysis

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Components of e-Manufacturing

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 A Technology Primer

Product Technology
 Computer-aided  Creates and communicates designs
design (CAD) electronically
 Group technology  Classifies designs into families for easy
(GT) retrieval and modification
 Computer-aided  Tests functionality of CAD designs
engineering (CAE) electronically
 Collaborative  Facilitates electronic communication and
product commerce exchange of information among designers
(CPC) and suppliers

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 A Technology Primer (cont.)

Product Technology
 Product data  Keeps track of design specs and revisions
management (PDM)
for the life of the product
 Product life cycle  Integrates decisions of those involved in
management (PLM)
product development, manufacturing, sales,
 Product
configuration customer service, recycling, and disposal
 Defines products “configured” by customers
who have selected among various options,
usually from a Web site

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 A Technology Primer (cont.)

Process Technology
 Standard for  Set standards for communication among
exchange of product different CAD vendors; translates CAD data
model data (STEP) into requirements for automated inspection
 Computer-aided and manufacture
design and  Electronic link between automated design
manufacture (CAD) and automated manufacture (CAM)
(CAD/CAM)
 Computer aided
process (CAPP)  Generates process plans based on
database of similar requirements
 E-procurement
 Electronic purchasing of items from e-
marketplaces, auctions, or company
websites

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 A Technology Primer (cont.)
Manufacturing Technology
 Computer  Machines controlled by software code to perform a
numerically control variety of operations with the help of automated
(CNC) tool changers; also collects processing information
and quality data
 Flexible  A collection of CNC machines connected by an
manufacturing automated material handling system to produce a
system (FMS) wide variety of parts
 Manipulators that can be programmed to perform
 Robots repetitive tasks; more consistent than workers but
less flexible
 Conveyors  Fixed-path material handling; moves items along a
belt or overhead chain; “reads” packages and
diverts them to different directions; can be very fast
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 A Technology
Primer (cont.)
Manufacturing Technology
 Automatic guided  A driverless truck that moves material along a
vehicle (AGV) specified path; directed by wire or tape embedded
in floor or by radio frequencies; very flexible
 An automated warehouse—some 26 stores high—
 Automated storage
in which items are placed in a carousel-type
and retrieval system
storage system and retrieved by fast-moving
(ASRS)
stacker cranes; controlled by computer
 Continuous monitoring of automated equipment;
 Process Control makes real-time decisions on ongoing operation,
maintenance, and quality
 Automated manufacturing systems integrated
 Computer-integrated through computer technology; also called e-
manufacturing (CIM) manufacturing
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 A Technology Primer (cont.)
Information Technology
 Business – to –  Electronic transactions between businesses
Business (B2B) usually over the Internet
 Business – to –  Electronic transactions between businesses and
Consumer (B2C) their customers usually over the Internet
 Internet  A global information system of computer networks
that facilitates communication and data transfer
 Communication networks internal to an
 Intranet
organization; can be password (i.e., firewall)
protected sites on the Internet
 Intranets connected to the Internet for shared
 Extranet access with select suppliers, customers, and
trading partners
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 A Technology Primer (cont.)

Information Technology
 Bar Codes  A series of vertical lines printed on most packages that
identifies item and other information when read by a
scanner
 Radio Frequency  An integrated circuit embedded in a tag that can send
Identification tags
and receive information; a twenty-first century bar code
(RFID)
with read/write capabilities
 A computer-to-computer exchange of business
 Electronic data documents over a proprietary network; very expensive
interchange (EDI) and inflexible
 A programming language that enables computer – to -
 Extensive markup computer communication over the Internet by cataloguing
language (XML) data before its is sent
 Software for managing basic requirements of an
enterprise, including sales & marketing, finance and
 Enterprise resource accounting, production & materials management, and
planning (ERP) human resources
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 A Technology Primer (cont.)
Information Technology
 Software for managing flow of goods and information
 Supply chain among a network of suppliers, manufacturers and
management (SCM) distributors
 Software for managing interactions with customers and
 Customer relationship compiling and analyzing customer data
management (CRM)  An information system that helps managers make
decisions; includes a quantitative modeling component
 Decision support systems and an interactive component for what-if analysis
(DSS)
 A computer system that uses an expert knowledge base
to diagnose or solve a problem
 Expert systems (ES)
 A field of study that attempts to replicate elements of
human thought in computer processes; includes expert
 Artificial intelligence systems, genetic algorithms, neural networks, and fuzzy
(AI)
logic

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 Understanding Capacity

Capacity is a
measure of the
capability of a
manufacturing or
service resource such
as a facility, process,
workstation, or piece
of equipment to
accomplish its
purpose over a
specified time period.
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 Understanding Capacity
The resources available to the organization—
facilities, equipment, and labour, how they are
organized, and their efficiency as determined
by specific work methods and procedures
determine capacity.
Capacity can be viewed in one of two ways:

1.As the maximum rate of output per unit of

time, or
2.As units of resource availability.
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6-
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 Typical capacity issues to address
include:
1. Can the facility, process, or equipment
accommodate new goods and services and
adapt to changing demand for existing
goods and services?
2. How large should facility, process, or
equipment capacity be?
3. When should capacity changes take place?

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 Capacity Decisions
Also referred to as capacity planning,
planning it implies the
process that determines the production capacity
required by an organization to meet the regularly
changing demands for its products. In this context,
‘capacity’ refers to the maximum amount of work
that an organization can complete in a specified
period of time.

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 Capacity Decisions … cont
Capacity decisions can be mainly categorized as:
1. Lead strategy: it refers to the addition of capacity
in anticipation of an increase in demand. It aims at
attracting customers away from the firm's
competitors in the market.
2. Lag strategy: it entails adding capacity only when
the firm is running at full capacity or beyond due to
an increase in demand.
3.  Match strategy: refers to adding capacity
gradually in limited amounts as a response to
change in demand in the market.

BMW electric car 6-

60
Short or Long Term?

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 Capacity Planning
Capacity
◦ maximum capability to produce
Capacity planning
◦ establishes overall level of productive resources for a
firm
Capacity expansion strategy in relation to steady
growth in demand
◦ lead
◦ lag
◦ average

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Capacity Expansion Strategies

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 Capacity Expansion
Capacity increase depends on
◦ volume and certainty of anticipated demand
◦ strategic objectives
◦ costs of expansion and operation
Best operating level
◦ % of capacity utilization that minimizes unit costs
Capacity cushion
◦ % of capacity held in reserve for unexpected occurrences

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Sample of Capacity Calculation

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Exercise 1

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 Chapter 10 Capacity Management

Understanding Capacity
1. Economies of scale are achieved
when the average unit cost of a good
or service decreases as the capacity
and/or volume of throughput increases.
2. Diseconomies of scale occur when
the average unit cost of the good or
service begins to increase as the
capacity and/or volume of throughput
increases.
 Economies of Scale
Unit cost decreases as output volume increases
Fixed costs can be spread over a larger number of
units
Production or operating costs do not increase linearly
with output levels
Quantity discounts are available for material
purchases
Operating efficiency increases as workers gain
experience

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© 2014 John Wiley & Sons, Inc. - Russell and Taylor 8e 68
Exhibit 10.2 Airbus A380 Economies of Scale